Since the coronavirus breakout and the following lockdowns, there is no doubt that Banks have been massively hit.

But there might be more to come.

First, with the deterioration of the economy, many Banks will have to build more reserves for credit losses. As JP Morgan underlined during its latest earnings, “provisions for credit losses was $8.3 billion, up $6.8 billion from the prior year driven by reserve builds which reflect deterioration in the macro-economic environment as a result of the impact of COVID-19 and continued pressure on oil prices.”

In the first quarter 2020, loan loss charges amounted $25.4B for the six big U.S. Banks.

From F.T. – US banks brace for surge in loan losses.(https://www.ft.com/content/87189e79-a442-44b9-a699-7bce47b5bc64)

Reality is there is almost no place to hide for Banks.

Secondly, even if that is not new, yields going lower and lower are not helping banks. Recently, the trend lower for longer has been accelerating and it looks more and more as if everyone is following Japan: lower for ever.

Example with the U.S. 2 Year:

Japan lead the way, followed by Europe and now with the U.S..

On Wednesday, the United Kingdom sold 3 year government bonds with a negative 0.003% yield.

 Last
Germany 2Y -0.695
Switzerland 2Y -0.652
Netherlands 2Y -0.619
Austria 2Y -0.562
France 2Y -0.526
Sweden 2Y -0.407
Spain 2Y -0.404
Portugal 2Y -0.317
Japan 2Y -0.173
U.K. 2Y -0.071
U.S. 2Y 0.167
Singapore 2Y 0.254
Australia 2Y 0.285
Canada 2Y 0.314
Hong Kong 2Y 0.326
Italy 2Y 0.526
Thailand 2Y 0.54
Poland 2Y 0.59
South Korea 2Y 0.819
Vietnam 2Y 1.391
China 2Y 1.675
Philippines 2Y 2.769
Brazil 2Y 3.82
India 2Y 4.308
Russia 2Y 4.67
South Africa 2Y 5.09
Mexico 20Y 6.96
Turkey 2Y 9.18

There is no doubt that negative yields have been a killer for European Banks. Since last September and tiering for example, the ECB has been trying to give a bit of relief to the European Banking System. Never too late I guess.

In theory, a steepening of the yield curve should help Banks and the recent U.S. steepening might be good omen.

But there are many Buts here. To name a few: the long dated Treasury Yields are higher mainly because of the amount of supply coming from the Treasury Department to finance its huge deficit, eurodollar futures are telling you that this situation is here to stay for quite a long time. Forget the V-Shaped Recovery, market is now pricing the Fed to be on hold for the next 3 years.

No surprise that the Banks’ price action has been very weak recently. They did not recover.

In the U.S., with the Dow Jones U.S. Banks Index – DJUSBK.

In Europe with the Stoxx 600 Banks – SX7P.

In Europe, there are some concerning price actions:

Santander – SAN.MC

Societe Generale – SOGN.PA

Sabadell – SABE.MC

… There are many charts in Europe like those ones…

No Deutsche Bank here which has been the best performer ytd. Down less than 5% in 2020.

But to be honest, some price actions in the U.S. are not great either.

Wells Fargo – WFC

The bottom line is that economic recessions and negative yields (or close to 0) are not helping the Banking Industry across the world.

The Equity Market is mainly driven by Technology Stocks and some growth names. There is no doubt that growth should be trading at a premium. As always question is the level of premium.

I might be old school here but I still want to believe that with Banks so weak it will be hard for the overall market to ignore this price action for too long. That is a clear signal that the situation is bad and will stay probably this way for quite some time.

As always when looking at Banks, here is a snapshot:

I hope it helps,

Gregoire

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